Anyone involved in retail or a related field may need to be able to calculate a commission to understand how much they're earning. Commission work is a common practice in sales, as well as in various other fields where bringing in amounts of money is an important part of the job role. Commissions may also work, for example, in cases where a buyer can save money by cutting costs, or where a claims handler or other business representative brings in money by resolving accounts payable. To calculate commission, you need to understand what system your business uses and any additional factors that may affect your total commission earnings.

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Steps

Part 1 of 2: Basic Calculation

1

Calculate the commission per individual units sold if your employer uses a placement fee system. In this type of system, you receive a commission rate per item sold.

You'll need to know whether the commission is a percentage (e.g., 30%) or a flat fee (e.g., $30).[1]

For example, if you sell 5 pairs of shoes at $100 each, and your commission is 20% for each item sold, the formula looks like this: 5 (100 x .20) = 100. Your commission is $100.

Sometimes the placement system is used in conjunction with one of the other types of systems described below.[2]

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2

Calculate the commission based on gross margin or net profit if your company uses a profit-based commission system. Some companies use this type of system as an incentive for employees to sell higher-profit products.

To calculate a product's gross margin, subtract the cost of the goods from the net sale.[4] For example, if a car sells for $12,000 and its net sale is $6,000, the gross margin is $6,000.

3

Calculate commission from cash received on a sale if this is the company's policy. When companies want to involve sales staff in collecting overdue money, this system is often used.[5]

For example, if an employee has collected only $500 cash for a product worth $1,000, their commission will be based on the $500.

Part 2 of 2: Other Conditions

1

Determine whether overrides are used. With overrides, when an employee sells beyond a targeted amount of a product, they receive a higher commission rate.[6] Be sure you understand whether the higher rate applies retroactively to all sales, or just the amount sold past the target number.

For example, the commission rate may be 2% of sales for up to $50,000, and 4% for all sales if you sell more than $50,000. If you sell $70,000 in goods for a given period (e.g., a month), your commission rate retroactively changes to 4%, so you receive $70,000 x .04 = $2,800.

Alternatively, you might earn a higher commission only on the amount above $50,000. In that case, you'd earn 2% of the first $50,000, and then 4% on the extra $20,000 (total sales minus the target amount: 70,000 - 50,000 = 20,000).[7]

2

Take split commissions into account. Split commissions are when more than one salesperson is involved in a sale and they share the commission. Alternatively, a regional sales manager may receive part of the commission of the salespeople in their region.[8]

3

Decide whether payment is for sales of the previous period or the current period. Sometimes it makes sense to use a payment delay when it takes additional time to gather all the necessary information to calculate commission (such as gross margin, etc.)[9]

4

Assess any additional bonus structures or related incentives. In addition to a straight percentage, a commission structure also can include any number of more complicated incentives for a sales person or other commission-earning individual.

Look for "top of the pack" bonuses. If you know that your commissions were the top-scoring numbers for a department or team, you may be able to calculate in eligibility for top-performance bonuses.

5

Address taxation of commissions. This part of calculating a net commission can be extremely difficult. For one thing, sales earners and other commission-earning individuals often get taxed at different rates, even relative to their previous annual earnings. The best way to anticipate taxes on a commission is to look at very similar commission amounts on a paycheck.

Understand your tax withholding status. The withholdings that you have indicated on employee or independent contractor paperwork determine how taxes are withheld from your paycheck. Know what's on your form to help calculate a net commission amount, after taxes.

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